FCA and PRA regulatory reference rules

13 June 2017

The issue

From 7 March 2017, the FCA placed a duty on all full scope regulatory reference firms (mainly banks, building societies and insurers) currently part of either the Senior Managers and Certification Regime (SM&CR) or Senior Insurance Managers Regime (SMIR) (relevant firms) to ensure that certain staff, including contingent workers or volunteers, meet the fit and proper regulatory standard.

PRA rules apply also to notified non-executive directors and those engaged on a self-employed basis or via a service company.

The changes

The FCA and PRA regulatory reference rules now require relevant firms to undertake due diligence by prescribed means to check as fit and proper all being recruited to the affected roles of:

senior management functions (SMFs);

FCA insurance controlled functions (CFs); and

significant harm functions (SHFs) under the certification regime.

The new reference Request obligation - relevant firms are required to request references from former employer(s) for candidates applying for these affected roles.

The new reference Response obligation – the response obligation applies more widely to all FCA authorised firms which must on receipt of a reference request for these affected roles provide all information relevant to an individual’s fitness and propriety.

Reference time periods – for relevant firms reference information is to be sought to cover the previous six year period. However there is no six year time limit covering 'serious misconduct' and a course of conduct continuing within the six year 'look-back' period covers individual events that occurred even earlier.

Intra group recruitment references rules - the rules allow relevant firms within a group not to request a reference from each other where the group has centralised records or alternative means of sharing relevant information as part of the fit and proper assessment of candidates. However, the relevant firm recruiting within the group must obtain information from the centralised records necessary to satisfy their obligation to ensure that the individual is fit and proper.

Prescribed reference template - the FCA and PRA template must be used by relevant firms when responding to reference requests. The information required of relevant firms by the template is in addition to the general requirement, applicable to all authorised firms, to provide all information relevant to the hiring firm’s fit and proper assessment of the individual.

Extent of reference disclosure – additional information must be provided as to:

whether the firm has concluded that the candidate was in breach of any of the conduct rules in the six years prior to the request and, if so, the basis;

whether the firm has concluded that the candidate was not fit and proper to perform a function in the six years prior to the request and the basis; and

details of the basis and the outcome of disciplinary action taken as a result of either of these decisions.

Firms must exercise their judgement as to what, if any, other information should be provided under the general obligation to provide 'all relevant information'.

Continuing reference updating obligation - there is an obligation on relevant firms to update a current employer who is authorised or to revise references given in the past six years, where the firm becomes aware of matters that would now cause them to draft the reference differently and concludes that misconduct or a rules breach has occurred.

Prohibition on obligations to give references outside the rules - the regulatory reference regime includes an explicit rule that, following an individual’s resignation or dismissal, all authorised firms must not enter into arrangements that conflict with the regulatory reference rules.

Record keeping - all authorised firms are required to retain records of ex-employees’ conduct and fit and proper status for a period of six years following termination of employment or resignation.

Regulatory reference compliance policies - all authorised firms are also required to establish and maintain adequate policies and procedures to comply with regulatory reference requirements.

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